ULIP vs SIP – Which is a better investment

What is a ULIP?

A Unit Linked Insurance Plan (ULIP) is a life insurance plan that combines life insurance and market-linked investment into a single plan. When you invest in a ULIP, a portion of the premium is allocated towards providing life insurance coverage, while the rest is invested in market-linked funds such as equity, debt, or hybrid funds. The performance of these funds influences the returns you earn from your investment. The key benefit of a ULIP is the ability to switch funds according to your risk profile and market conditions, which allows you to adjust your strategy over time.^[1]

One of the features of ULIP is its five-year lock-in period, which encourages long-term commitment. After the lock-in period, investors can, if necessary, make partial withdrawals from the fund subject to terms and conditions.^[1]

 

What is an SIP?

A Systematic Investment Plan (SIP) is a disciplined investment strategy that allows individuals to invest a fixed amount regularly in mutual funds. SIPs focus purely on wealth creation and do not provide any life insurance coverage. ²

Under SIP, by investing a fixed sum regularly, investors buy more units when the market is down and fewer units when the market is up. This method helps reduce the impact of short-term market fluctuations, making SIP an option for long-term investors.^[2]

 

Key Differences Between ULIP and SIP

There is a fundamental difference between the two. One is a life  insurance product combined with a market-linked investment component, while the other is an investment strategy where an investor invests a fixed amount at regular intervals. Besides this, there are a few more differences between ULIP and SIP:

 

ULIP vs SIP: Which is Right for You?

1. If You Need Both life Insurance and market-linked Investment

   ULIPs are suitable if you want a dual-purpose product providing life insurance coverage and potential wealth growth. While they come with higher costs and a longer commitment (due to the lock-in period), they can be an ideal choice for those who want to combine life insurance and investment into a single plan.^[4]

2. If You Prefer Pure Investment

   If you are solely interested in wealth creation and do not need life insurance, SIPs can be a cost-effective and flexible option. With SIPs, you can start with smaller amounts, regularly invest, and change your contributions at any time. This makes SIPs particularly suitable for long-term investors looking to invest in mutual funds.^[4]

 

How to Calculate Returns from ULIPs and SIPs

Here’s how to calculate the returns for each:

 

1. ULIP Returns

Use a ULIP calculator. Enter the premium amount, the tenure etc. The calculator shows projected returns and maturity benefits of ULIP.

 

2. SIP Returns

Use an SIP calculator. Input your monthly investment, tenure etc. It computes the total corpus, capital invested, and estimated gains.

Always review assumptions, such as the rate of return and duration, when using calculators to project returns.

 

Key Factors to Consider Before Choosing Between ULIP and SIP

While selecting either ULIP or SIP, evaluating these factors may help you:

 

1. Goals

Determine your primary need. Choose a ULIP if you need life insurance protection alongside the potential of market-linked growth. Opt for an SIP if your priority is wealth creation through regular investments.

 

2. Risk and Return Profile

The risk in both products depends on the underlying funds (equity, debt, or hybrid). ULIPs include various charges (mortality, fund management, etc.), which can affect net returns. SIPs only have the expense ratio.

 

3. Investment Horizon and Liquidity

Your investment horizon plays a key role in choosing the right product. ULIPs are designed for long-term financial planning and come with a mandatory five-year lock-in period that promotes disciplined investing. After the lock-in period, partial withdrawals are permitted, allowing access to funds during exigencies while keeping long-term goals on track. SIPs also offer flexibility in accessing investments, but ULIPs combine investment potential with life insurance coverage, making them suitable for individuals seeking structured, goal-oriented wealth creation with financial protection.

 

4. Flexibility in Premiums

Consider your financial ability. SIPs allow you to increase, decrease, or stop contributions. ULIPs are flexible in switching funds, but you have to commit to premium payments to keep the policy active.

 

5. Life Insurance Coverage

Understand the payout upon death. A ULIP gives the death benefit that is the sum assured or the fund value, whichever is higher. SIPs are pure investments with no life insurance coverage.

 

Key Takeaways

1. ULIP combines life insurance and market-linked investment, while SIP focuses only on mutual funds.
2. ULIPs are life insurance products that offer a combination of life insurance and market-based returns, whereas SIPs are meant purely for investment.
3. If you’re unsure which is better—SIP or ULIP, evaluate your goals. ULIPs suit those seeking life insurance plus market-linked returns, while SIPs may work better for purely investment-focused, flexible growth.

 

Conclusion

In conclusion, both ULIP vs SIP offer unique benefits, and the choice depends on your financial goals. If you need both life insurance and market-linked investment in one product and are comfortable with a long-term commitment, ULIP may be the right option. On the other hand, if you want to invest regularly in mutual funds, with a focus solely on wealth creation, SIP can be a better choice. Your decision should align with your specific financial needs and investment preferences.

 

FAQs

1. What is the difference between ULIP and SIP?

   ULIP combines life insurance with market-linked investment, while SIP is an investment strategy focused purely on mutual funds.^[3]

2. Can I switch between funds in ULIP?

   Yes, Unit Linked Insurance Plan offer flexibility to switch between different funds based on your risk profile and market conditions.

3. Which is better: SIP or ULIP?

   The decision depends on your financial goals. SIPs are for pure investment, while ULIPs are suitable if you need life insurance and market-linked investment together.^[4]

4. Do ULIPs offer tax benefits?

   Yes, ULIPs offer tax deductions under Section 80C (under old tax regime), and the maturity proceeds are tax-free under Section 10(10D).^[1]

5. Are ULIPs risk-free?

   No, ULIPs are market-linked, so the returns are subject to market risks, similar to SIPs.

6. Can I modify my SIP contributions?

   Yes, SIPs offer flexibility to increase, decrease, or stop your contributions.

7. How are ULIP charges structured?

   ULIPs come with various charges like premium allocation charges, policy administration charges, fund management charges, among others.

8. Can I invest in both ULIP and SIP simultaneously?

   You can subscribe to ULIPs and SIPs to build a balanced portfolio and improve financial stability. Additionally, you can also get tax benefits for the premiums you pay in ULIPs.

9. What is the minimum investment required for ULIP and SIP?

   The minimum investment amount for ULIPs and SIPs varies by plan and insurer. ULIPs may require a minimum monthly premium of about ₹1,000, whereas SIPs start at ₹100 per month.^[1]

10. How does liquidity differ between ULIP and SIP?

    ULIPs have a mandatory five-year lock-in period, after which partial withdrawals are allowed. SIPs generally allow redemption at any time, except for ELSS funds that have a lock-in period.

Sources

1. https://cleartax.in/s/sip-calculator#:~:text=What%20is%20the%20minimum%20and%20maximum%20amount%20that%20can%20be%20invested%20through%20SIP%3F